WorldSys: Austrian Home Study Course, Week 3

The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course“. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along.

It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.

1 Did Mises always intend to be an economist?

No, he began more interested in history.

2 What book formed Mises’s initial views on economics?

Carl Menger’s magisterial Principles of Economics. Mises had formed certain free-market convictions as a result of his empirical observations, but this book opened his eyes to a universe of positive economic theory which could enrich and extend what he’d learned on his own.

3 What was Mises’s major post from 1909 until he left Austria?

He was an economist at Vienna’s Chamber of Commerce, where he was able to win a number of important battles for sound money and sound economics.

4 In monetary theory, what was the “problem of the Austrian circle”?

While the Austrians had done spectacular work in what today would be called microeconomics there didn’t seem to be a way to apply their analysis to money. People subjectively value goods, and all the competing/intersecting subjective valuations together constitute market demand. But money appears to be a different thing because no one wants money for its own sake, they want money because of what it can buy.

This would seem to trap us in a circular argument: demand precedes and determines price for all goods except money, which people want because it already has purchasing power attained because people want it.

5 In The Theory of Money and Credit, how did Mises solve this problem?

By successfully developing a theory of money grounded in individual choice and consistent with Austrian views on price while simultaneously deploying one of his greatest contributions to economics: the regression theorem.

Mises noticed that the ‘price of money’ regresses backward until the development of money as a unit of exchange in predominantly barter economies. People value a dollar based on what they know a dollar could buy them yesterday; they valued a dollar yesterday because of what a dollar could buy them the day before that.

Keep subtracting days until you arrive at the point that gold or silver became a medium of exchange. At that point these were actual commodities bartered against other commodities and evolving into ‘money’ because they are easier to carry around and divide into smaller units.

In this way, Mises broke the circularity of the money argument and incorporated monetary theory into the edifice of Austrianism.

6 In what sense did Mises’s monetary theory integrate micro- and macroeconomics?

The Misesian monetary theory integrated micro- and macroeconomics because it was able to ground the most staunchly macro phenomenon — money, thought to be a radically different from other goods and resistant to similar ‘subjective value’ analysis — in the most staunchly micro phenomenon — individual choices.

7 In what sense did Mises differ from Menger and Böhm-Bawerk on the nature of utility?

Both of the earlier Austrians left indications that they believed utility to be measurable in some important way. That is, it was meaningful to speak of a good’s ‘total utility’ and attempting in some way to connect this with its marginal utility. Mises argued firmly for utility being ordinal; that is, that goods can be ranked in order from most to least preferred, but one can’t attach units to this valuation and say that one values apples ‘three utilons’ more than pears.

Moreover, the utility of a carton of eggs bears no fixed mathematical relationship to the utility of one egg. Instead, we are now dealing with the single utility of one larger unit (namely: a carton of eggs).

I confess that this is something I’ll have to engage with more down the road because it seems to me that there must surely be a sense in which utility can be thought of in the aggregate. Otherwise how can we say that a freer society is preferable to one of slavery and serfdom? Perhaps Mises would say that such judgments are perfectly valid but not with the purview of economics? I don’t know.

8 What were the three building blocks (formed by previous economists) that Mises used to construct his theory of business cycles?

They were: a boom-bust model of business cycles which already existed in the Currency School; the distinction between the ‘natural’ rate of interest and the ‘bank’ rate of interest developed by Swedish economist Knut Wicksell; the capital and interest theory of Böhm-Bawerk.

9 How did Mises contribute to the debate over socialism?

Immensely. There had been ample pushback against socialist intellectuals in the decades prior to Mises, but this had mostly centered on problems of incentivizing such distasteful chores as taking out the trash and the obvious fact that socialism would require quite a lot of coercion to be made workable.

In a series of breathtaking articles Mises argued forcefully that the collective ownership of the means of production could not succeed even on its own terms. The issue is that such a scheme would make prices completely inert. How could a central planner possibly calculate profit and loss if the state were in sole control of the means of production? Would a given unit of lumber be better used making additional apartment complexes, going toward a gymnasium, being used to build a concert hall? Now multiply this same question across everything the government uses to produce anything.

This ‘calculation argument’ sent the socialist intellectual world scrambling to formulate a reply. By the 1930s many were satisfied that communist theorists like Oskar Lange had succeeded in answering, but modern Austrians contend that the history of communism in the 20th century eloquently proved Mises and Hayek correct.

10 What is praxeology?

Praxeology is the science of human action, of which economics is but a part. It begins with the action axiom — ‘man acts’ — and the proceeds to deduce a variety of a priori truths that together constitute a framework required for any understanding of human beings.

Mises endorsed a variant of methodological dualism when he decided that separate techniques were required for studying men and molecules. Molecules might behave but they don’t act in the sense of taking purposive steps to achieve a goal. Therefore a science of human action must begin with different premises and use a different approach. Mises advocated for careful, rigorous deduction.

11 Name some economists influenced by Mises.

F.A. Hayek, Oskar Morgenstern, Gottfried von Haberler, Fritz Machlup.

12 What were the main themes of Omnipotent Government and Bureaucracy.

The former made the case that both leftwing and rightwing collectivism are undergirded by statist totalitarianism. The latter pointed out the many ways in which bureaucracies, both in governments and nonprofit organizations, are fundamentally different from profit-seeking enterprises by virtue of facing an entirely different set of incentives.

13 What was the German-language predecessor of Human Action?

It was called Nationalökonomie, and Human Action was a version so extensively revised and updated as to be a whole new book.

14 Did the American economics profession welcome Mises?

He had some allies and students, he found a teaching position at the New York University Graduate School of Business, and he found a publisher for Human Action, but by and large no, he was not welcomed by America’s economic intellectuals.

15 Was Mises a believer in logical positivism?

No. He penned a critique of it called The Ultimate Foundation of Economic Science: An Essay on Method, and was dismayed to see some of Hayek’s implicit endorsements of neo-positivism.